Compression at the top

One of the major stories of recent years is that of rising income and wealth inequality, whereby the rich are supposedly getting richer and the poor poorer. A primary piece of evidence for this is increases in the shares of income and wealth accruing to the top 10% of the distribution, the top 1% of the distribution, and the top 0.1%. This effect seems to be stronger the higher you go up in the distribution. That is, the share of the top 1% is growing faster than that of the top 10%, and the share of the top .1% is growing faster than the share of the top 1%.

However, at the very top of the distribution, in the realm of the “richest man in the US” (the top .000001%), the situation is very different. Not only is the richest guy not keeping up with the rest, but the wealth of the richest guy actually appears to be falling. In 1992, the richest guy in America was Sam Walton, founder of WalMart, with $65 billion (well over $100 billion in today’s dollars). He was eclipsed by Bill Gates in the mid-1990s. In 1999, when Microsoft hit its all-time high price, Gates had a reported net worth of $101 billion. Today, Gates is still at the top of the list, but his net worth has plummeted to around $70 billion. Thus, despite substantial increases in aggregate net worth over the past 15 years (in fact, a doubling, from $40 trillion to $80 trillion), and rising concentration of wealth, the richest guy has lost 30%!

What is going on here? It appears that there are significant forces working to constrain wealth. One of which is competition. In 2009, Microsoft was the undisputed titan of the software world. Since then that company has faced huge challenges from small and large competitors. Today, Microsoft shares titan status with Apple, Google, Facebook and others.

A second force is mortality. The Walton family Walmart fortune is still largely intact, but it is now spread across six of Sam’s kids, and soon to be many more grandkids.

A third force is charitable giving. Over the past 15 years the Bill and Melinda Gates Foundation has given away multiple $ billions to support initiatives in education, health care and poverty alleviation.

This example of the richest guy seems to me to contradict the argument that wealthy people just keep getting wealthier. Instead, it looks like wealth runs up against a number of powerful forces that tend to slow or even reverse further gains. Maybe these forces apply more generally than just to the richest guy. To see if this is true, we would need to follow specific people as they enter into the rarified atmosphere of the top 1% or .1% of the wealth distribution. The type of a study that would do this is called a “panel data” study wherein a set of people (the “panel”) is followed over a period of years. Indeed, there are ongoing panel studies that monitor the distribution of income, but as far as I know only for broad classes of the income distribution. For example, the IRS recently released a study showing that over the period 1999 to 2007, more than 40% of the top 10% of income earners in 1999 were no longer in that category eight years later.

Unfortunately, I am not aware of a study like this for the top 1% of the wealth distribution. All we know (or think we know) is that the combined wealth of the top 1% is bigger today than it was a few decades ago. But almost surely the top 1% today is not comprised of the same people as the top 1% then. Instead, my guess is that we have substantial entry into and exit from the top 1%.

While we don’t have visibility into the top 1%, we can look a little more deeply. The same source for the richest guy (the top .000001%) also provides data on the richest ten (top .00001%) and the richest hundred (top .0001%). This source is the “Forbes 400” which is a listing of the 400 richest people in America published annually by Forbes Magazine since 1982. By comparing the names on the list from year to year we can get an idea of the degree of stability at the top. For example, in 2014 the Forbes 400 contained 24 names that did not show up in 2013. This also means that 24 names that did appear in 2013 have disappeared in 2014. This 6% “turnover rate” has been pretty steady over the years. This implies that over one generation (since 1982) more than 85% of the richest people have been replaced in the top ranking.

Again, we don’t have adequate data to explore the turnover rate in other parts of the wealth distribution. But if we did, my guess is that we would find substantial turnover there as well. What I think this means is that we are not creating a permanent upper class of rich people.

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